I once watched a worker that was trying to insert a screw through two pieces of sheet metal. He aligned the pre-drilled holes and then started the screw with his fingers. At that point he looked around for a tool to finish the job and discovered that the only tool within reach was a hammer. He picked up the hammer and gave the screw a whack, driving it into place. Days later the screw fell out, causing the sheets of metal to vibrate against each other during normal operation of the equipment.

There is a proper tool for every job. Use of the wrong tool often produces substandard results. Sometimes it is necessary to make do with what you have. That’s called innovation. But regularly using the wrong tool when the right tool is available is just plain stupid.

One of the basic tenets of classical liberalism is to regard government as a tool to be used only where it is most appropriate; the chief role of government being to safeguard and expand liberty. Many people (from all over the political spectrum) view government as a big stick to be employed in forcing others to conform to their particular view of good.In this light, John Steele Gordon writes here about why government is the wrong tool for running a business. Steele admits that “Capitalism isn’t perfect.” But he argues that it’s a better than government for running a business. He says that the reasons this is so include:

Governments are run by politicians, not businessmen.

Politicians need headlines.

Governments use other people's money.

Government does not tolerate competition.

Government enterprises are almost always monopolies and thus do not face competition at all.

Successful corporations are run by benevolent despots.

Government is regulated by government.

Gordon’s article includes some classic statements. He poses the maxim, “Politicians can only make political decisions, not economic ones.” That singular statement ought to be relentlessly pounded into students in every civics and economics course in the nation. It ought to run in a banner across the TV screen anytime a broadcast features any politician or anyone discussing political proposals.

Describing the Social Security system, Gordon writes:

“It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.”

Well, the company accountants might refuse to certify the books. Or the company could be run like Enron. Problems occur when investors are prohibited from taking their money elsewhere, as apparently was the case with many Enron employees. Another good point:

“Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.”

It is worth reading the article to see Gordon’s discussion of governments using other people’s money and how the taxpayer is shunted aside in negotiations regarding government spending. You can say that the taxpayers get their say at the ballot box and that businesses also use other people’s money through equity and debt, but these are vastly different things.

Politicians know that they are only marginally accountable to taxpayers and that they can manipulate the system to shut down most backlashes that might result from government spending. Groups lobbying for benefits know this too. When businesses use debt, they are subject to the articles of the contract. The parties to the debt have entered into the contract willingly (except in cases where government is pumping cash into businesses). If equity holders are unhappy with a company, they can often dump their shares within minutes and take their money elsewhere. Try doing that as a taxpayer.

Gordon describes how gross inefficiency is the default behavior when government tries to run a business. The GAO recently found that “no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent.” This kind of thing is typical in a government run business.

It is true that private enterprise has its share of inefficiencies and problems. But it is unquestionably the best tool for running businesses. Government’s role is to ensure a level playing field and to prevent businesses from stifling competition. When government steps in to prop up failing businesses, it works directly counter to its appropriate mandate. When government runs business itself, it is like using a hammer where a screwdriver would be appropriate. Or maybe it’s a hammer and a sickle.

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